Permanent Establishment in India: “checking the rule”

1 The India s Delhi High Court (HC) has recently ruled that outsourcing of services by UScompany to Indian affiliate does not constitute PE. It is aim of this reporttoprovideaguidance to determine whether an Indian affiliate constitutes a PE by checking the rule . Permanent Establishment inIndia: checking the rule Permanent Establishmentin IndiaTheIndia s Delhi High Court1(HC)has recently ruled that outsourcing of services byUS companyto Indian affiliate does not constitute PE. The case presented twocompanies incorporated and residents of USA (E Funds Corporationand E Funds ITSolutions Inc.)

2 , henceforth:FCs) and one Indian company, E Fund India(henceforth:IC), which was an indirect wholly owned subsidiary of E Funds to the High Court Decision, Tax Authorities contended that FCs had a taxablepresence in India as per the Indian Tax Laws (ITL) by way of business connection aswell as a PE as defined under Article 5 of the India-USA Treaty. On appeal, theTribunal upheld the Tax Authorities contention that a PE , why has the HClead to a different conclusion?In order to answer this question eligibility for beingconsidered as a PE must be anIndian affiliate eligible as PE?

3 Tax LawBackgroundFrom a domestic law perspective, Permanent Establishment is defined underIndianIncome Tax Actasa fixed place of businesswherethe business of the enterpriseiswholly or partly carried onthat indicates business connection between the FC and definition is in close connection with the definition from an this regard,Double TaxationAvoidance Agreements stipulatethataPermanent Establishment thatgeneratesincome with a business connection inIndiawillbe taxable in India. All other income without business connection is out of thescope of taxation in Permanent Establishment rulesFor a company todeterminetheexistenceof a PE in India, the following type of PErules,in Double Taxation Avoidance Agreements,must be Place PE:two requisitesmust be fulfilledfor a foreignEnterprisetoconstitute a PE in India.

4 Fixed place of businessand businessof the foreign enterprise is wholly or partly carried to the HC, the FCsdid not have any assets or a licensed office to beregarded aspresence in main reason was thathere was no evidence thatthe Taxpayers had the right to use or disposal right over the premises of (DEL)Hence, even though the Indian affiliate was carrying on core activities for the FCs, itwould not constitute aFixed place PE of the FCsin of the requisites ismissing so no PE can be PE: a PEexistswhenaforeign enterprisehasa dependent agentin Indiaprovided that the agent.

5 Exercises ofauthority to conclude contracts on behalf of the foreignEnterprise, secures orders wholly or almost wholly for the foreignEnterprise, maintains the stock of goods or merchandise from which the agent regularlydelivers on behalf of the foreign HCstatedthatthe ICdoes not constitute an Agency PE of the FCsas it was notallowedto conclude contracts on behalfof theFCsand did not maintain any stock ormerchandise or secure orders on behalf of the , the IC would not constitutean Agency PE of the FCs in PE: a PEexistsif the employees oftheforeign enterprise furnish or performservices in India, other than services covered under Royalties or Fees for TechnicalServices, for a specified period of the case, two employees of theFCswere transferred to the ICforworking for theIndian affiliatebuttheir entire expenditure was born by the they were notrendering any services in India on behalf of theFCs.

6 Such employeesprovidedstewardship function. Hence,no PE exists for theFC seconding such the ruleThe decision of the HC of Indiaprovides guidanceto determinewhether an Indianaffiliate constitutes a of the following questions must bepositivelyanswered: Does the FC havea PE under the Fixed Place rule?To have a fixed place as PE outsourcing ofcore activities of the foreign enterprise toan Indian affiliatemust be performed along with the right ofuse of the premises orfacility from where the services are non-compliance of one of therequisites derives in the absence ofPE in India, either by the nature of the activity orby the nature of the use of the premises.

7 Does the FC haveaPE under theAgency PErule?To constitute aPEunder the Agency PE rule,the nature of the affiliate in Indiamustbe analysedand it must qualify as a dependant agent by performing any of theactivities aforementioned, ofcontracts on behalf of the foreignEnterprise,securement of ordersfor the foreignEnterprise or maintenanceof goodsor merchandise from which the agent regularly delivers on behalf of the foreignenterprise. Does the FC haveaPEunder the Service PE rule?To constituteaPE under the service rule, the nature and functions performed by theseconded employees and who exercises control and supervises them needs to beexamined.

8 If such employees provided stewardship function, no PE exists for the FCseconding such , if such employees worked under the control ofthe Indian affiliate, no PE could short,business connectionregarding PE exists when anIndian subsidiaryconstitutes a fixed place, not only physically but also in matter ofrights, for theforeign company; it performs activities as dependant agent; or the nature and controlof services performed in India are directly connected with the foreign to contact:Mirna Screpante